BAE warns failure to agree Typhoon price with Saudi might hit profits

British defence giant BAE Systems warned profits might be lower than expected
in 2012 because it has still failed to agree a price with Saudi Arabia for
its Typhoon fighter jets despite securing the order five years ago.

BAE said that failure to agree a price on the Typhoon contract by the time of its full-year results in February might result in lower than expected earnings per sharePhoto: ANDREW YATES/AFP/GettyImages

The FTSE 100 company said “issues remain to be resolved before contract pricing, acceptable to all parties, can be agreed” on the programme to supply 72 jets to the Royal Saudi Air Force. It is a government to government deal known as “Salam” and worth roughly £4.5bn in total.

BAE said that if an agreement on price was not reached by the time it publishes its full-year results on February 21, the group’s underlying earnings per share would be about 3p per share lower than previously expected.

Analysts had been expecting earnings per share of around 40p, and a dividend of around 19p for the full year.

“The dividend wouldn’t be affected unless there was more and more slippage in earnings,” said Edward Stacey, analyst at Espirito Santo.

Mr Stacey said that despite the warning, he believed the Middle East would be a good growth market for BAE and has a “buy” recommendation on the shares.

“Acceptable pricing terms remain the group’s driver to such an agreement, not the timing of the settlement,” BAE said. The Salam deal was originally struck before the global financial crisis took hold when the economic backdrop was far stronger.

BAE finalised a deal with Saudi in 2007, and delivered a total of 24 Typhoon aircraft between 2008 and 2011. It is thought that the price negotiations being thrashed out are partly retrospective.

The company said “all parties remain committed to the programme” and said building of the aircraft for the Royal Saudi Air Force continued, with delivery expected to start again in 2013.

BAE said it had made progress on some of its other work in Saudi, including negotiation on contracts to support and provide equipment under the Saudi British Defence Cooperation Programme for the next five years, which are expected to be signed before the end of 2012.

In May, BAE won a £1.6bn contract to support Royal Saudi Air Force training, which includes the supply of 22 new Hawk trainer aircraft, 55 Pilatus PC-21 aircraft, and other training equipment.

Last month David Cameron embarked on a major push to secure new Typhoon orders for BAE while on a three-day visit to the Middle East. It is hoped that Saudi will place what Downing Street sources described as a “substantial” order for more jets, on top of the 72 already agreed.

It is understood BAE is close to securing an order for 12 Typhoon jets from Oman, with hopes than an agreement will be reached by the end of the year.